In a typical logistics profit and loss account, warehousing rental is one of the top monthly expenses you’ll see. For this reason, ensuring you have the right sized warehouse in the correct location can be one of the most important and complicated decisions for a company.
If you choose a warehouse simply based on current capacity, you’re likely to hinder your future growth potential. On the other hand, having too much unused space is a waste of cash. Because of these complex considerations, most companies outsource their warehousing and distribution functions to third party experts.
There’s the theory that your products plus other customers’ products should result in you paying less for the warehouse storage space you need. So does the method by which you are being charged for this space really benefit you?
Some practical examples of the benefits and downsides of these three models:
Paying a dedicated rate per month for your warehouse means you’re almost guaranteed to pay for space you’re not using. For example, let’s say you’re paying for 300 square meters of racking space. If your actual products only take up racking for 200 square meters, you’ll still be paying for 100 square meters that would be empty and unused. We also know this because any provider that charges rates in this way would never allow the client to use more than the space they are paying for. They would want to ensure a maximum revenue is achieved for available space, so it would be a key metric they’d check. There would also have to be serious considerations taken when expanding space is required.
The benefit of this method is that it is predictable. Expensive, but predictable.
On the surface, this may seem a fair way to charge. You have to remember that you’ll always be at the mercy of the third-party provider in making sure they’re using space and pallet locations as efficiently as possible. This would be difficult to manage and therefore hard to know for sure whether you’re being charged fairly. Some suppliers’ policy is to have one product per pallet location. This could be a massive downside to you, especially if you only have a few units on hand taking up very little space on a pallet.
The benefit of this method versus the first one is that theoretically you wouldn’t be paying for empty locations in the warehouse. However, you’d definitely be paying for partially utilised space.
With this method, billing is simple in that you pay a single fee for all services including the warehousing. However, it can be difficult to understand how the bill is calculated. It’s also hard to know if you are paying a fair rate for the warehouse spacing that you are really using. This lack of visibility could cost more than you should be paying – after all, as the saying goes, there’s no such thing as a free lunch.
Keeping this in mind, we approach the calculation of warehouse fees differently. We do it using a very simple methodology, but one that we know will always be in our clients’ favour. It goes as follows:
In other words, we charge you a rate per cubic metre per day for the products that you have in stock on that day. This means we don’t charge per cubic metre of the location – rather for the products taking up space. The exact calculation is therefore:
There are lots of benefits to charging in this way:
Our calculation method makes our clients happy. However, it’s also inherent to the way we approach business. As our Managing Director Greg Kruger puts it, “We always work in our clients’ best interest, as this is core to the values of our business.”